Ethereum prepares itself for the Merge
Ethereum chain’s billion of dollars worth of cryptocurrencies, millions of users, and thousands of applications are moving to a new, improved blockchain. The latest update to the Ethereum network is the result of years of research and development, culminating in The Merge, which harnesses Ethereum's Proof-of-Stake chain for actual technical use. The Merge is expected to take place on September 15th.
Ethereum, the second largest cryptocurrency by
market capitalization, is using The Merge to change its consensus mechanism
from Proof-of-Work (PoW) to Proof-of-Stake (PoS). Consensus mechanisms enable
cooperation and security of distributed systems.
Ethereum already has an operational PoS network
called Beacon Chain (released in 2020), but it is not yet used to process
transactions. For now, it's only in use as a staging network for computers
using the Ethereum network as they prepare for the PoS upgrade.
Ethereum's full transition to the PoS mechanism
requires Beacon Chain to merge with the Ethereum PoW network.
The price of Ether futures, along with the rest of the crypto market, has fallen by more than half from last year's peaks.
PoW vs PoS
While Bitcoiners believe in the superiority of
the PoW mechanism, many other crypto networks work with different consensus
mechanisms. Until now, Ethereum, which has been a PoW network is changing to
update its mechanism to Proof-of-Stake which many other crypto-networks such as
Polkadot, Cardano and Avalanche already use.
PoW and PoS differ in how they decide the right
for miner/validator to create the next block in the chain.
In today's PoW system, Ethereum miners compete
to mine blocks by solving cryptographic puzzles, just like in the case of
Bitcoin. To solve puzzles, PoW consumes a lot of energy.
In the upcoming PoS mechanism, Ethereum
validators who stake at least 32 ether (ETH) into the network will be randomly
selected to create blocks. The more ether a validator stakes, the more likely
it is to be selected to create a block and thus reap the block reward.
In both PoW and PoS mechanisms, the
miner/validator who wins a block is rewarded with transaction fees and new
ethers. PoS validators also receive rewards for other actions to secure the
network.
Transactions After The Merge
When the Ethereum network is congested due to
a large number of transactions, it is more expensive to use the network. The
more transactions there are online, the higher the costs. During Ethereum's
DeFi and NFT booms, expenses often rose high and were widely complained about
on social media. Currently, with the crypto market a relatively living a quiet
life, transaction costs are at low, as the number of DeFi and NFT transactions
online has dropped significantly.
Average transaction cost of the Ethereum
network (dollars per transaction)
Transaction costs are not expected to change
with The Merge, even if a new boom appears to increase costs. Future upgrades
to the Ethereum network, expected in 2023 at the earliest, are expected to help
with the network's transaction costs.
Transactions speed up a bit with The Merge.
Currently, in the PoW mechanism, Ethereum blocks are mined approximately every
13-14 seconds. In the PoS mechanism, blocks are generated evenly every 12
seconds.
By comparison, Bitcoin's blocks are generated
about every 10 minutes on average, while competing networks Solana and
Avalanche generate blocks significantly faster than Ethereum and Bitcoin.
The Merge's potential impact on the price of ETH
The crypto discussion on social media is
currently hot regarding the trading of The Merge.
It is naturally impossible to predict the
behavior of the ETH price in advance. This is especially true in the case of
Ethereum, as a similar change in the consensus mechanism has not been seen
before in the crypto world. Due to the number of variables and unknown factors,
it is almost impossible to predict what will happen to the price of ETH as a
result of The Merge.
For years, those who invested and believed in
the Ethereum network have been waiting for the unique update to the network's
core technology brought by The Merge. Along with addressing concerns related to
the network's environmental impact, PoS brings a new use for ETH tokens in the
form of staking.
Although The Merge brings a lot of good things
to Ethereum, it does not guarantee an increase in the price of ETH. The Merge
brings changes to the amount of ethers mined and how they are distributed. This
can be either a positive or a negative factor depending on who you ask. There is
also a risk that The Merge will not succeed or that PoS will later be found to
be less secure than PoW.
You can also read a lot of speculation in the
media that The Merge would have already been priced in at the price of ETH.
Triple
Halvening
The price of Ethereum can be affected either
positively or negatively by "Triple Halvening", thanks to which Ether
can even become a deflationary cryptocurrency. In this case, the amount of
ethers in circulation would decrease over time.
The three different factors of Triple Halvening are:
- A significant decrease in ETH emissions: The Ethereum
network is currently releasing approximately 13,500 ethers daily as block
rewards, which on an annual basis corresponds to approximately 4.3 percent of
the total amount of ETH. Thanks to the PoS change, annual emissions are
expected to drop to around 0.3-0.4 percent.
The decrease in the amount of block rewards also reduces the selling pressure of ETH miners. A decrease in selling pressure can potentially have a positive effect on the price of ETH. - Burning ETH as a result of the EIP-1559 update: The EIP-1599 update improves the Ethereum user experience and burns some of the rewards for mined Ethereum blocks. Burning reduces the number of ETH tokens in circulation as they disappear into the ether.
- ETH staking: In Ethereum
staking, the investor deposits his ETH holdings and receives as a staking yield
at the time of writing this an annual return of approximately 4.1 percent,
which is paid in ETH tokens. In addition to the staking yield, ETH stakers can
also enjoy the better security of the network.
As the number of stakers increases, the security of the Ethereum network improves and makes hostile attacks less feasible. Stakeable ETH tokens are locked for a certain period of time, during which they are out of ETH liquidity at the exchanges.
Triple halving and The Merge affect the Ethereum network in the following ways:
- ●A more secure and stable network
- ●An increase in ETH scarcity (i.e. less ETH tokens in circulation) due to decreasing emissions, transaction cost burning and staking.
- ●Significantly lower energy consumption
The Ethereum community is very optimistic
about the changes brought by The Merge to the operation of the network.
However, there are numerous unknown factors and it is unclear how the market
will react to The Merge.
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